The Convergence of Foreign Direct Investment and Restructuring Evidence from Cross-Border Divestitures

Aryeh Blumberg and James E. Owers

Two major economic trends over the past decade have been an accelerated rate of divestiture restructuring within the U.S. economy, and an increasing flow of cross-border Foreign Direct Investment (FDI) between economies. These trends have received considerable attention separately, but there has been little research on how closely they are related. This paper examines a transaction where they converge - the sell-off of business units by U.S. firms to foreign acquirers. We examine whether the buyer being foreign leads to a different valuation effect for the U.S. firm selling the assets. FDI denotes the acquisition of real operating assets, as distinct from financial assets. Cross-border divestitures are one strategy for implementing FDI. The paper includes a brief review of why there might be different valuation impact in sell-offs when the buyer is a foreign firm. We find that the gains to divesting firms when the buyer is a foreign firm are no larger than when units are divested to domestic acquirers. This and other findings are different from those which have been reported in recent research examining the acquisition of whole-firms by foreign acquirers. The empirical findings in this paper have substantial strategic and policy implications and provide additional insights into the issues associated with restructuring and FDI.